Straddle

A straddle (English for " straddle " ) is an option strategy. There is speculation that all about Rapidly changing courses ( long straddle ) or courses that remain the same (short straddle ). The short straddle involves unlimited risk of loss.

Long Straddle

In order to have a long position in a straddle, one buys a (long ) call option and a (long ) put option are both on the money on the same underlying (underlying, which can share, an index or the be similar), with the same exercise price and expiration date. In a long position of the straddle you stroke a profit when the price of the underlying asset has changed substantially at the exercise date, ie is very far away from the exercise price. Therefore, one enters into a long position when one considers that the markets in the future will be very volatile, but one can not say whether they will rise or fall sharply.

The risk of loss in this strategy to the original capital invested ( purchase price for the put purchase price Call expenses) limited. This case occurs if the underlying reaches exactly the strike price on the exercise (both options expire worthless ). The possible yields is not limited.

Short Straddle

For a short position in the straddle it behaves exactly the opposite: It sells a call option and a put option ( short call and short put ). The investor makes a profit if the price of the underlying asset is very close on the grant date at the strike price. So you then enters a short position, if one is of the opinion that the markets will change in the future very little.

In this strategy, the risk of loss on the sale of a call option is unlimited, because the seller is obliged to deliver the underlying asset at the agreed price. If the seller / the obligor " uncovered ", ie he has the base title is not in his custody, he must buy it on the market at the offered price there to present it to the person entitled to. Does he have the title, however, in the depot, then the loss is the difference between the market price and the agreed delivery jetzigem price (plus the option premium) limited (so-called "covered " short -call ). When selling a put option, the downside risk is limited, however, as the seller of the put option has to buy the underlying asset at the agreed price - the maximum loss is therefore on these agreed price (less the option premium ) limited. The possible yields is limited to keep the collected premium.

Nick Leeson used for his speculations about the performance of the Nikkei 225 futures and straddles. This led to the bankruptcy of Barings Bank. It happens that the risk between Long Straddle and Short Straddle is not differentiated correctly. A long straddle involves the same risk such as a long investment strategy in stocks, the loss of original capital invested. Only in the Short Straddle the risk of loss is unlimited.

Covered Straddle written

In a written Covered straddle one shares long gone and a short put.